ECONOMY-ARGENTINA: Debt Swap a Desperate Bid for Time

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, May 25 2001 (IPS) - Argentina is to embark on a costly initiative Monday in an effort to postpone payment on the nation’s foreign debt, marking the distance travelled since the euphoria of six months ago when the government mistakenly believed that an international financial package was the key to escaping recession.

The plan is a debt swap that will be the largest operation of its kind ever, and will allow this South American nation to delay payment of 17 billion dollars of a total 80 billion that comes due over the next five years.

Argentina, Latin America’s third largest economy, thus becomes – once again – testing ground for a new economic recipe, though this time it cannot count on help from multilateral credit institutions or the United States Treasury.

The backing of 40 billion dollars the International Monetary Fund (IMF) and other organisations and countries provided Argentina six months ago – known as a “financial shield” – was presented at the time by the Fernando de la Rúa government as the solution and the necessary guarantee to get the national economy moving.

But its confidence-boosting effects – targeting economic agents – evaporated within two months. Argentina holds a public debt of 145 billion dollars and has no prospects for economic growth to respond to the debt in the short term.

Foreign creditors, meanwhile, began to fear that the country would default on its loans, a climate Argentina’s economic authorities are again struggling to dispel, though this time by delaying payments.

“It is a relief,” “a breather,” “a temporary solution” or “a way to move the ball forward,” depending on which analyst, banker or business executive polled on the debt swap decision, which the government launched with a strong dose of caution.

In a section of the Buenos Aires stock exchange, crammed with stern-looking bankers and entrepreneurs, Economy Minister Domingo Cavallo announced on Thursday – though without his usual enthusiasm – the release of the new bonds, which will be available as of Monday and for a period of five days.

Through this operation, the government hopes to lighten the most urgent financial pressures in order to focus all efforts on reactivating the economy, which for the last three years has been on a downward spiral as the domestic market that shrinks with each passing day and unemployment hovers near 15 percent.

“If the financial shield didn’t work and its impact dissipated in two months, this ‘solution’ is the same thing: an expensive scheme that produces limited, short-term relief, and which will then leave us a considerably larger debt,” Eduardo Curia, economist for the opposition ‘Justicialista’ (Peronist) Party, told IPS.

Curia outlined how the economic crisis had picked up steam. Last December, then-minister of Economy, José Luis Machinea, obtained the financial shield after negotiating with the IMF and others. In February, the first signs of faltering consumer confidence appeared. Then, in March, Machinea resigned.

Ricardo López Murphy was named to replace him, but lasted barely 15 days, then handed over the reins of the Economy Ministry to Cavallo.

The Peronist economist considers it “senseless” to offer a new deal to bond holders who will be paid much higher interest than the current rate, on top of the commission costs of the seven financial entities that organised the swap.

Economists and analysts working in the banking sector, as well as members of the business community, seem to agree with Curia’s appraisal of the situation.

Alberto Ades, of the Goldman Sachs financial corporation, maintains that the swap is just “a temporary solution.” Others used more dramatic terms to describe the operation.

“The bond swap today is necessary in the same way a terminally ill patient needs morphine: it helps calm him down, but doesn’t save his life,” said Carlos Rodríguez, who served as assistant minister of Economy here in the 1990s.

“The swap implies exchanging expensive debt for even more expensive debt, leaving behind a very weighty inheritance in terms of interest payments,” he warned.

Héctor Valle, head of the Buenos Aires-based Economic Research Foundation cautions that “a bond exchange at high interest rates would have a negative impact on the Argentine economy.” The costs will be seen in a deepening of the fiscal deficit and once again put off economic growth, he adds.

Nearly all economists here agree that the success of the bond swap will depend on implementing additional measures. Recommendations vary according to the entity the expert is representing, but include fiscal adjustment, public spending cuts, a deepening of Mercosur (Southern Common Market) integration, or more free trade with the United States.

Curia is among the few who support a proposal the Economy Ministry has rejected: a voluntary halt in foreign debt payments.

His formula would imply acknowledging that, just as is currently feared, Argentina cannot handle its immediate commitments and needs the bonds to decline in value to be able to cancel them.

“That is what could happen in the end anyway, even if the government doesn’t propose it, because if creditors continue to lack confidence in our recovery, and if Argentina proves unable to reactivate the economy to confront the maturities, the default phantom will return,” he warned.

President De la Rúa did not participate in this week’s debt swap announcement – unlike his role in launching the credit shield last December -, nor was the news delivered with any sense of excitement. The normally effusive Cavallo limited himself to presenting the proposal as a “solution”, though the idea he conveyed was that of paying the price to win more time.

Argentina’s gross domestic product (GDP) has been sliding for the last three years, a phenomenon that implies not only rising unemployment and decreased consumption, but also a fiscal deficit that foments an ever-deeper recession and increasing costs for private sector loans.

Each time the government placed more bonds on the internal market, the buyers asked for higher interest rates, and the dynamic followed that path until the desired effects of the financial shield – which consisted of a loan schedule backed by reduced rates – had completely dissipated.

The new exchange measure shows a distancing from the Brady Plan, introduced in 1993 so that Argentina could postpone payment deadlines on 25 billion dollars. At the time, the Economy Ministry – then, as now, headed by Cavallo – obtained low interest rates because the nation’s economy was in full expansion.

This time around, analysts estimate that the interest rates the market will demand for postponing collection on certificates that expire between this year and 2005, could reach 15 percent, a heavy price to pay for an economy that is not growing and which must quickly adjust its operating expenses.